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The fallacy of new business creation as a disciplining device for managers

Loss, Frederic and Renucci, Antoine (2002) The fallacy of new business creation as a disciplining device for managers. Discussion paper, 398. Financial Markets Group, London School of Economics and Political Science, London, UK.

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Identification Number: 398

Abstract

This paper investigates a negative externality of new business creation. When being perceived as a good manager is a necessary condition to establish a firm in the future, we show that a priori talented managers may indulge in undertaking risky projects now. Indeed, such a choice renders more difficult the updating of believes process regarding their actual types. Unfortunately, this in turn leads them to perform less effort, which comes at the expense of economic efficiency. Hence, the career concerns we examine do not discipline good managers. However, we show that employers can reduce managerial slack by resorting to financial markets monitoring.

Item Type: Monograph (Discussion Paper)
Official URL: http://fmg.lse.ac.uk
Additional Information: © 2002 The Authors
Subjects: H Social Sciences > HF Commerce
H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
JEL classification: G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
G - Financial Economics > G3 - Corporate Finance and Governance > G39 - Other
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D89 - Other
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
Date Deposited: 19 Aug 2009 10:41
Last Modified: 27 Feb 2014 15:36
URI: http://eprints.lse.ac.uk/id/eprint/24902

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